Depreciation, systematic and specific sources,

1. The rate of depreciation in valuation process needed in (i) the estimation of

future growth or decline in rental cash flows, (ii) the estimation of the exit
yield at the end of the holding period, and (iii) the estimation of future
refurbishment expenditure. There is a major concern that unreliable
estimates of depreciation may lead to property market mispricing. The issues
have been addressed in some works with varying levels of success.

2. Depreciation is a decline or loss in relative value of a property in

comparison with the equivalent prime modern or new property, which
achieve best rental in the similar sub-market

3. Depreciation are typically divided into two groups

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4. The first group suggests depreciation arises through ageing process whilst
the second group identifies multiple causes of depreciation and focuses more
on commercial properties

5. Two broad sources of depreciation are physical deterioration and

obsolescence

6. Physical deterioration refers to normal wear and tear of a building through

use and the passage of time. The rate at which physical deterioration
progressed is a function of the design and the quality of construction,
including the nature of the materials and the level of maintenance carried out

7. Physical deterioration can cause a decline in the utility of a building and

subsequently the rent, yield and market value

8. Obsolescence is defined as “a decline in the usefulness or utility

9. Various categories of obsolescence, such as functional, aesthetic, economic

etc have been introduced.

10. Classifies obsolescence into site and building as a property consists of

site and building
11.
Building obsolescence may arise due to three aspects: building design,
building systems and buildings services. As the society’s characteristic way
of carrying out social and economic activities changes, the desirability of
various properties to tenants also changed. The need to occupy high quality
space and achieve a more efficient and more desirable image in carrying on
business leads to an increase in demand for properties with modern and
high-tech specifications

12. Site obsolescence is a decline in usefulness of a site. In order to

consider causes of site obsolescence, it is important to analyse the
mechanism upon which site values are derived. The value of a site is a
function of a complex series of factors. Generally, land or site value, is
affected by the demand for and the supply of it. These are based on the
demographic structure and the patterns of land use in a particular area.

13. Suggests that factors, which may cause a particular site or location to
obsolete, include deterioration in accessibility, factors specific to site (such
as size), environmental and other market-wide factors such as the level of
economic activities in the area.

14. Depreciation is explained by factors specific to property: physical

deterioration, building obsolescence and site obsolescence.

15. The factors are particularly concern with the national economy which
in turn influence the level of business activities hence determines the
demand for property. Consequently, this can be regarded as another
depreciation factor. Whilst property characteristics can be specific
dimension, market wide-factors can be treated as systematic aspect of
depreciation.